Can I invert myself and not pay taxes?

By Nicholas Wapshott
August 13, 2014

The Pfizer logo is seen at their world headquarters in New York

The hot tax-dodging business trend of the summer is inversion. A U.S. company buys a company in a country with a lower corporate tax rate, relocates its headquarters there and funnels its income through the new head office. As long as it does not repatriate profits, the self-exiled company can avoid paying U.S. corporate taxes.

The United States is the only country that taxes its citizens on their worldwide income.  Wherever you earn money, the Internal Revenue Service wants a slice of it. But if, as the 2012 Republican presidential nominee Mitt Romney said and U.S. Supreme Court justices ruled in Burwell v Hobby Lobby and Citizens United v Federal Elections Commission, corporations are people, shouldn’t the converse be true? Why can’t all Americans relocate their places of domicile abroad and dodge taxes just like a company?

If only it were that easy.

Let’s take it one step at a time. There has been considerable alarm at U.S. companies’ rush to the exits. Under a fiduciary duty to maximize dividends and share prices for stockholders, businesses are seeking to avoid the 35 percent federal corporate income tax they are liable for here. Many American business leaders believe high corporate tax rates put their companies at a competitive disadvantage with the rest of the world. As do many business-leaning, tax-hating and federal government-loathing politicians.

A general view of the Internal Revenue Service Building in WashingtonIf you add local and state taxes, U.S. corporations pay tax on their income at a nominal rate of 40 percent, far more than many other countries. Britain, for example, has a similar economy but its top corporate tax rate is just 21 percent. Germany, which also has a successful, mature economy, levies its companies at nearly 30 percent. While few U.S. companies end up paying this nominal rate, since they offset various expenses, exemptions are much the same in comparable economies. This disparity tends to beggar American businesses and discourage domestic investment, which means fewer U.S. jobs.

Hence the clamor to relocate. Eight major companies are planning to nominally move — though not actually transfer their bricks-and-mortar businesses — to low-tax countries in the next 12 months, joining about 41 U.S. companies who have already done so since 1982. All they have to do is buy a foreign company at least 25 percent their size and, on paper at least, they become a foreign entity — and avoid the U.S. corporate tax.

This trick makes particular sense to pharmaceutical and medical-equipment companies and the like that earn most of their income from licensing products abroad. The drug company AbbVie, for example, hopes to relocate to Britain, and the medical- device firm Medtronic is heading for Ireland, where the corporate tax rate is just 12.5 percent.

A screen displays the share price for pharmaceutical maker AbbVie on the floor of the New York Stock ExchangeBy far the biggest of these proposed mergers of convenience is Pfizer’s attempt to relocate to London by swallowing the British drugs company AstraZeneca. The Brits have so far played hard to get but the transatlantic wooing continues.

Unfortunately, there is no individual equivalent to corporations merging with another company abroad. Even if an American marries a foreigner, they remain liable to file a tax return and pay federal income tax. And it is not so easy to give up American citizenship, though an increasing number are doing so. Last year saw a record high number shred their passports. Even so, only 2,999 citizens out of a total 318.6 million slipped the tax net in 2013 — and many were already living permanently abroad and could simply be tired of the expense and irritation of filing tax-return and other disclosure-of-assets forms.

Nor is abandoning America cheap. Malta sells citizenships for $900,000 — hardly a steal unless you have an enormous income on which to avoid taxes. Portugal offers residency if you have $675,000 to invest locally, but that sum does not include citizenship. For the same sum, Ireland will let you live in the Emerald Isle and promises citizenship in five years. The bargain basement for buying residency is Latvia, which costs just $96,000 for a five-year stay.

There is a lengthy procedure if you buy your way out of America. Legal paperwork and an awkward interview with the federal authorities to sign an “oath of renunciation” can be costly. There are also exit taxes to pay. And the law may be changing to make it even more expensive. Senators Chuck Schumer (D-N.Y.) and Bob Casey (D-Penn.) were so angry when Facebook co-founder Eduardo Saverin abandoned the United States — following on the heels of Tina Turner, Monty Python animator and director Terry Gilliam, the late chess master Bobby Fischer and a host of other celebs — they promised to introduce an “exit tax” of 30 percent on all the worldly goods of those who choose to kiss Uncle Sam goodbye. Even without that levy, the IRS made Saverin pay “hundreds of millions” in taxes before he was allowed to leave for Singapore.

Facebook co-founder Saverin speaks at Wall Street Journal event in SingaporeBut what about the notion that “corporations are people,” and perhaps the other way round? Alas, for my dreams of mounting a Supreme Court challenge to insist on being treated like a corporation, the idea that corporations and individuals are interchangeable is not even a legal fiction. When Romney told voters at the Iowa State Fair, “Corporations are people, my friend,” he was pointing out the obvious truth that corporations are owned by stockholders.

Nor did the Supreme Court’s Hobby Lobby verdict equate people with corporations. It fastened instead on to the IRS’s definition  of “closely held corporations,” which means companies in which more than half the stock is held by five or fewer people.

Nor did the Citizens United verdict suggest that corporations were individuals in all meanings of that word. In their ruling the justices explained that they considered the meaning of the First Amendment “that prohibits Congress from fining or jailing citizens, or associations of citizens, for engaging in political speech” and concluded that as corporations were “associations of citizens,” they were entitled to exercise free speech. Alas, they only equated corporations with individuals in  regard to free speech.

While there is a long established precedent for corporations under contract law to be treated as people, there is still a way to go before corporations are treated as people in all respects. And if a change is made in the short run, it is likely to be to tax companies on the foreign earnings they leave abroad, not liberate people from their federal tax liabilities.

Moves are already afoot to clamp down on U.S. corporations’ abilities to dodge domestic taxes. While some Democrats (including President Barack Obama) accused companies of being unpatriotic, the president also fired a shot across the bows of companies dreaming of a tax-lite existence abroad. “Are there elements to how existing statutes are interpreted by rule, or regulation, or tradition, or practice,” he asked, “that can at least discourage some of the folks who may be trying to take advantage of this loophole?”

That suggests Obama will not wait for Congress to tighten the rules, as they did under President George W. Bush in 2002. He seems likely to tell the IRS to clamp down on the increasing number of companies that are exploiting the loopholes.

So my dream of my day in the Supreme Court with Grover Norquist and attorneys from Americans for Tax Reform at my side will remain a dream. And my plans for a virtual offshore existence for tax purposes while I remain living in Manhattan must be put on hold.

I must say I am rather disappointed.

 

PHOTO (TOP): The Pfizer logo is seen at their world headquarters in New York, April 28, 2014. REUTERS/Andrew Kelly

PHOTO (INSERT 1): A general view of the Internal Revenue Service Building in Washington, May 14, 2013. REUTERS/Jonathan Ernst

PHOTO (INSERT 2): A screen displays the share price for pharmaceutical maker AbbVie on the floor of the New York Stock Exchange, July 18, 2014.  REUTERS/Brendan McDermid

PHOTO (INSERT 3): Facebook co-founder Eduardo Saverin speaks at the Wall Street Journal Unleashing Innovation executive conference in Singapore, February 21, 2013. REUTERS/Edgar Su

 

7 comments

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Hello corporation are not people, privately held companies are granted the same amendment rights Because the person owning the business has the right to do or not what they wish in running the company. Not so in a public corporation. It is controlled by an elected board and they must answer to the investors which elected them. The tax rate in this country are out of control for all who pay taxes.

Posted by thereyUgo | Report as abusive

I wish I had a tax problem!

Posted by BidnisMan | Report as abusive

Or we could just lower the corporate tax rates to encourage companies to 1)stay; 2)return if they’ve “relocated”; or 3)attract foreign corporations to relocate their headquarters here. I’d be willing to wager that Walgreens will be hit with a shareholder lawsuit for failing to relocate abroad and take advantage of the more favorable tax climate ;). Their stock was slammed when the news came out that they would remain stateside. Patriotism or not, the Board of Directors still have a fiduciary duty to the shareholders of the Corporation, and failing to maximize shareholder value (i.e. retaining profits by reducing tax expenditures) could be viewed as a breach of this duty. I don’t think we’ve seen the end of this story. Stay tuned!

Posted by MarkZ_CPAJD | Report as abusive

Since corporations are people, they should not be allowed to “vote” when they leave the US. In other words, they should not be allowed to donate to politicians or PACS. Can’t have foreigners buying our elections.

Posted by MarkSmith123 | Report as abusive

MarkSmith123…its already too late!

Posted by rikfre | Report as abusive

If corporations want to leave the U.S.; we should let them. We should also notify them that all their patents and trademarks are no longer valid, that all their goods and services not actually manufactured or provided in the United States will be treated as imports and possibly subject to trade tariffs, and that they will no longer have access to any of the myriad goods and services provided by the U.S. State Department, Defense Department, Commerce Department, Patent Office, etc..

Posted by ThoseWhoServe | Report as abusive

Fake concerns promoted all over the media about corporate inversions. Tax loopholes allow capitalism to breathe.

Posted by PaterTenebrarum | Report as abusive